Interest rates will only fall to 3.75% next year, says Santander, days after much spicier forecasts from Goldman Sachs

Interest rates will fall to 3.75 per cent by the end of next year, banking giant Santander has predicted, bucking a trend of forecasts for bolder rate cuts.

With the Bank of England’s base rate currently at 5 per cent, this would mean cuts worth 1.25 percentage points by Christmas 2025.

Santander’s forecast comes days after Goldman Sachs’ prediction that interest rates would fall to 2.75 percent over the same period raised eyebrows.

Looking ahead, Santander economists also believe that UK interest rates will remain between 3 and 4 per cent for the foreseeable future.

Graham Sellar, head of intermediary channels at Santander UK, said: “While no-one has a crystal ball, as we approach the next MPC meeting and an expected 0.25 per cent base cut, we can assume calmly that the ultra-low rates The basic interest rate of recent years is now a thing of the past.

“Instead, we are moving toward a new norm, in which the base rate will not only fall to 3.75 percent by the end of next year, but will remain between 3 and 4 percent for the foreseeable future.” .

If the forecast turns out to be correct, this will likely mean that mortgage rates will see little change in the future.

This is because, currently, future interest rate cuts are already built into the prices of fixed-rate mortgages.

This is why the lowest priced five-year fixed rate products hover just above 3.75 per cent, rather than closer to the Bank of England’s base rate of 5 per cent.

Graham Sellar adds: ‘While the base rate does not dictate mortgage rates, it can affect swap rates, which is what lenders pay financial institutions to acquire fixed finance over a set period of time.

“This means that those looking to buy a property or remortgage may well see rates remain relatively static compared to the volatility of recent years.”

Santander’s prediction contrasts sharply with that of Goldman Sachs. Economists at the Wall Street giant now predict that UK interest rates will fall to 2.75 per cent over the course of next year.

This would mean the Bank of England cutting much more than Santander or the broader market is currently pricing in.

Mortgage brokers have come out in force, expressing concerns about the accuracy of Goldman Sachs’ forecasts and fearing it could influence borrowers’ decisions.

For example, people may opt for short-term fixed deals or two-year trackers in the hope that they can take advantage when rates drop.

Dariusz Karpowicz, director of Albion Financial Advice, accused the investment banking firm of playing with the crystal ball and warned that it should not be treated as a “financial gospel”.

Karpowicz told the Newspage news agency: “While his prediction of a base rate of 2.75 per cent for next year is certainly surprising, we must remember that economic forecasts are often as reliable as the British weather.”

‘If rates fell that low, we could witness a housing market revival that would make the Roaring Twenties look tame.

‘Let’s not count our rate cuts before they hatch. If a week is a long time in politics, a year is an eternity in economics.’

Craig Fish, director of Lodestone Mortgages & Protection, also believes that Goldman Sachs is very wrong with its latest forecast.

‘If we see the base rate at 3.5 percent, we will be lucky. The Bank of England is likely to take a much more cautious approach to avoid repeating past mistakes.

‘Reporting such predictions is irresponsible and only aggravates the situation.

‘Consumers may be tempted to wait or hold on to the hope that these low rates will materialize, but that is highly unlikely. “Your decisions based on this misinformation could have serious consequences.”

Justin Moy, managing director of EHF Mortgages, also argues that a base rate of 2.75 per cent by the end of next year is a bit extreme.

“Achieving that would require serious economic stagnation over the next 12 months,” Moy added.

“Unfortunately, the narrative around expected low rates significantly influences mortgage borrowers who are looking for solid guidance in making their decisions, especially when swap rates are rising and pushing fixed rates higher.”

Goldman’s latest UK prediction is based on its calculation of the “neutral” interest rate at which the economy can balance between low unemployment, on the one hand, and inflation at its 2 percent target. , on the other.

By that measure, the Bank’s current interest rate is “notably restrictive,” the analysis maintains.

That means interest rates are still working to restrain economic growth and crush inflation, even though inflation has now fallen below 2 percent.

In a note to clients, Goldman said its analysis “thus reinforces our view that the Bank of England will ultimately cut rates more than financial markets estimate, given continued progress on disinflation.”

He also noted “recent moderated comments.” This is likely a reference to comments by Bank of England Governor Andrew Bailey, who said he could be “a little bit more aggressive” in cutting rates if inflation remains under control.